Barb, This piece explains 90/10 in detail, though I was talking about calls when I also use puts in the same strategy for stocks I hate. siliconinvestor.com
With the thirds strategy, which can be used in a 90/10 or in my capital appreciation account (I rarely use it in the income account as the things I am doing there are not that risky) works like this: When I think a stock is way undervalued, I buy what I consider a 1/3 position (generally based upon 20 full positions of equal dollar amounts purchased in my total portfolio). If the fundamentals remain the same, but the stock goes down, I will often add another third. And if it happens again, I will usually do my homework on the company all over again from scratch, and then add the last third. ON the way up, when I think a stock is at fair value, I sell the first third. When I think it is about 20% overvalued, I sell the second third. The last third is a bit more of a gambler's delight. Sometimes I think the price is just too ridiculous to be there at all and punt it. Other times I hold on to see just how far morons can take the stock up before they reach my point of maximum queasiness.
The difficult part about the thirds technique is not the technique itself, but in picking the right companies, long and long puts or calls.
An example, sort of, is Vignette today. It went down on what was really fantastic news that the analysts were too dumb to understand. I had the stock long, an at the money call sold, and an out of the money put long. Today I removed both options at profits and am basically long my first third of the stock. So, it is kind of a bass-ackwards way of buying a first third, but I consider it a first third today. I will buy more if the fundamentals remain as strong as they are and the stock declines into the low 30s to high 20s. |
